Domestic Content Requirements for Renewable Energy Manufacturing

April 10, 2012

Certain jurisdictions that have implemented policies that promote the development of local renewable power generation have added domestic content requirements for equipment
sourcing to achieve economic objectives, such as job creation.

But, at least in the short-run, domestic content requirements are likely to increase the cost of renewable energy generating equipment, and therefore also the developer’s cost of generating renewable energy. Depending on the type of renewable energy support policy with which the domestic content requirement is linked, this may have the effect of increasing consumers’ electricity prices, or reducing the number of renewable energy facilities built. In the last case, it is possible that the reduced renewable energy output leads to overall reductions in employment in renewable energy generation and manufacturing.

Key messages

Domestic content requirements (DCRs) compel renewable energy developers to source a specified share of equipment from local suppliers. A principal goal of a domestic content policy is to ensure that the government’s renewable energy policy produces tangible local economic benefits. This Brief is focused on the short-run economic impacts of the DCR and its effectiveness in increasing employment.

By forcing developers of renewable energy to source from domestic suppliers, the DCR is expected to raise the cost of generating renewable electricity, at least in the short-run.2 That is because sourcing from domestic equipment manufacturers reduces access to technology providers from outside the jurisdictions that might be lower cost than the domestic options. The higher equipment costs are likely to reduce the amount of renewable electricity generated. In this way, DCRs can actually work against one of the main goals of the renewable energysupport policy. Additionally, if renewable energy equipment costs are increased by a significant enough margin as a result of the DCR, the imposition of the DCR may even reduce employment associated with manufacturing renewable energy equipment and renewable energy generation in the short-run.

Two Canadian jurisdictions, namely Ontario and Quebec, have tied government support for renewably generated electricity to DCRs